Hedge fund investments down but not out in Alaska

Date: Friday, December 19, 2008
Author: Pat Forgey, Juneau Empire.com

State's permanent and retirement funds sought high returns, but not with Madoff.

A giant Ponzi scheme that's roiled Wall Street since last week wasn't part of Alaska's big investment funds and probably couldn't have been, state investment managers say.

The Alaska funds' process of "due diligence," simply checking out investment management companies prior to investing with them, would almost certainly have caught the alleged Bernard Madoff Securities fraud if he'd even tried to do business with the state, say Alaska Permanent Fund and Department of Revenue managers.

"I'm stunned by the scope of it, especially given the obvious signs that were there," said Mike Burns, executive director of the Alaska Permanent Fund Corp.

Among the reported clues were lack of a major accounting firm, the financial press has reported.

National reports also say Madoff's exclusive and secretive fund refused to tell investors how it made its money, a red flag for most investors.

While many hedge funds have their own methods, Alaska's investment managers say they would not invest in something they didn't know about.

Both the Alaska Permanent Fund and the Alaska Retirement Management Board have over the years expanded their investment options into hedge funds, the lightly regulated investment options only available to wealthy, sophisticated investors.

Many of those investors who lost as much as $50 billion in the Madoff deal are appearing decidedly less sophisticated now.

In some cases, what are known as "fund-of-fund" managers get a commission to place investors' money in numerous hedge funds.

Both big Alaska funds use fund-of-fund managers as intermediaries, but both say they expect those managers to earn their management fees by knowing well what they're investing in.

The Department of Revenue Chief Investment Officer Gary Bader said the state's managers look thoroughly into the funds they invest with.

"That's not to say that makes them immune, but they want to have a pretty good idea how they make their money," Bader said.

Burns said the permanent fund is also protected by placing investments in a wide variety of funds with an average of about $6 million each. The permanent fund's single largest hedge fund participation is about $30 million, he said.

"Diversity is one of the biggest protections that we have," he said.

That's more likely to be needed if a manager were to make a bad judgment call on an investment rather than a Madoff-style alleged fraud, Burns said.

Hedge funds, which the permanent fund calls "absolute-return" strategies, use methods other than typical stock and bond investing to make money.

Both Burns and Bader say their funds expanded into hedge funds in an effort to expand and balance their investments.

The strategy hasn't been entirely successful, Burns said. The permanent fund's hedge funds are not doing as well as expected.

"They have not met their benchmark at all," he said.

Permanent fund managers had expected their absolute return investments to make 4 percentage points over the LIBOR interest rate, a common industry measure.

So far this year, the various funds are down from 9.3 to 18 percent, for an average 13 percent decline, he said.

They have done better than stocks, however, he said. Some permanent fund's equity investments are down 33 to 35 percent, he said.

Bader said the ARM Board's hedge funds were down about 11.8 percent so far, which is not good but still better than this year's dismal returns from stocks.

• Contact reporter Pat Forgey at523-2250 or e-mail patrick.forgey@juneauempire.com.